Environmental Insurance Expected to Grow

CHICAGO-Charles L. Perry Jr. can envision a day not too far off when environmental insurance bought at the closing table is as commonplace as title insurance policies are today in commercial real estate transactions. The president and CEO of West Hartford, CT-based Environmental Warranty Inc. told lenders at the commercial and multifamily administrative conference of the Mortgage Bankers Association of America Thursday that environmental insurance already outweighs the cost of conducting due diligence on a property.

“In two to three years, you’re not going to go to a commercial real estate closing and see someone produce a Phase I environmental report, just as today you’re not going to see someone produce a title search or an abstract,” says Perry, whose firm is an insurance underwriter brokerage working with lenders, owners, buyers, securitizers, investors and REITs.

Perry says the upfront premium for environmental insurance can be 30% more than the cost of a Phase I study. Premiums can cost $1,200 for $1 million in insurance and up to $3,000 for $5 million to $10 million in coverage.

Lauren Cerda, director of structured finance of commercial mortgages for Fitch, says rating agencies such as hers have been concerned about substituting insurance for Phase I studies. Of particular concern is what happens if the insurer fails to pay a claim.

Perry says there is not much of a track record available yet on claims, but suggests buyers check on the insurer’s reputation in the market for paying off as well as their financial ability. Cerda suggests insurers should have a AA rating or better.

Cerda adds policies may have exclusions that fail to address all environmental risks. In addition, while Perry expects them to be commonplace in the future, policies are still the exception rather than the rule.

Policies are sold in the forms of a lender’s policy that pays claims up to the mortgage balance if environmental problems are found, or an owner’s direct liability policy. Policies can cover a portfolio or a single site, Perry adds, though single-site policies can be more expensive.